10-Q 1 file001.txt QUARTERLY REPORT SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ---------------------- FORM 10-Q QUARTERLY REPORT UNDER SECTION 13 OF THE SECURITIES EXCHANGE ACT OF 1934 For Quarter Ended June 30, 2002 Commission file number 1-4858 ------------------------------------------------------------- INTERNATIONAL FLAVORS & FRAGRANCES INC. --------------------------------------- (Exact Name of Registrant as specified in its charter)
New York 13 -1432060 _____________________________________ _____________________ (State or other jurisdiction of incorporation (IRS Employer or organization) identification No.) 521 West 57th Street, New York, N.Y. 10019-2960 _____________________________________ _____________________ (Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (212) 765-5500 Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Sections 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding twelve months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No ____________ _____________ Number of shares outstanding as of July 31, 2002: 94,743,937 PART I. FINANCIAL INFORMATION 1 ITEM 1. FINANCIAL STATEMENTS INTERNATIONAL FLAVORS & FRAGRANCES INC. CONSOLIDATED BALANCE SHEET (DOLLARS IN THOUSANDS) (Unaudited)
6/30/02 12/31/01 --------------------- --------------------- Assets ------ Current Assets: Cash & Cash Equivalents $ 34,115 $ 48,521 Short-term Investments 361 384 Trade Receivables 381,362 328,858 Allowance For Doubtful Accounts (11,535) (10,835) Inventories: Raw Materials 216,238 212,270 Work in Process 9,354 10,853 Finished Goods 180,903 192,861 --------------------- --------------------- Total Inventories 406,495 415,984 Deferred Income Taxes 54,570 77,449 Other Current Assets 60,015 36,000 --------------------- --------------------- Total Current Assets 925,383 896,361 --------------------- --------------------- Property, Plant & Equipment, At Cost 959,956 975,630 Accumulated Depreciation (439,224) (443,157) --------------------- --------------------- 520,732 532,473 --------------------- --------------------- Intangible Assets, net 783,284 795,920 Other Assets 56,305 43,297 --------------------- --------------------- Total Assets $ 2,285,704 $ 2,268,051 ===================== ===================== Liabilities and Shareholders' Equity ------------------------------------ Current Liabilities: Bank Loans and Current Portion of Long-term Debt $ 17,056 $ 23,716 Commercial Paper 145,845 204,229 Accounts Payable-Trade 97,469 85,659 Dividends Payable 14,242 14,215 Income Taxes 53,709 49,841 Other Current Liabilities 163,469 182,554 --------------------- --------------------- Total Current Liabilities 491,790 560,214 --------------------- --------------------- Other Liabilities: Deferred Income Taxes 6,730 44,553 Long-term Debt 978,837 939,404 Retirement and Other Liabilities 228,832 199,710 --------------------- --------------------- Total Other Liabilities 1,214,399 1,183,667 --------------------- --------------------- Shareholders' Equity: Common Stock 12 1/2 cent par value; authorized 500,000,000 shares; issued 115,761,840 shares 14,470 14,470 Capital in Excess of Par Value 104,751 126,170 Restricted Stock (598) (1,440) Retained Earnings 1,322,261 1,263,344 Accumulated Other Comprehensive Income (Loss): Cumulative Translation Adjustment (144,672) (156,266) Accumulated Gains (Losses) on Derivatives Qualifying as Hedges 968 (2,261) Minimum pension liability adjustment (20,009) (20,009) --------------------- --------------------- 1,277,171 1,224,008 Treasury Stock, at cost - 20,957,669 shares in '02 and 20,996,954 in '01 (696,669) (698,851) Note Receivable from Officer (987) (987) --------------------- --------------------- Total Shareholders' Equity 579,515 524,170 --------------------- --------------------- Total Liabilities and Shareholders' Equity $ 2,285,704 $ 2,268,051 ===================== =====================
See Notes to Consolidated Financial Statements INTERNATIONAL FLAVORS & FRAGRANCES INC. 2 CONSOLIDATED STATEMENT OF INCOME (AMOUNTS IN THOUSANDS EXCEPT PER SHARE AMOUNTS) (Unaudited)
3 Months Ended 6/30 ----------------------------------------------------------- 2002 2001 ---- ---- Net Sales $ 476,336 $ 478,216 --------------------- --------------------- Cost of Goods Sold 272,612 269,506 Research and Development Expenses 35,022 35,502 Selling and Administrative Expenses 78,921 81,001 Amortization of Goodwill and Other Intangibles 3,158 11,400 Nonrecurring Charges 9,242 8,780 Interest Expense 9,294 17,634 Other (Income) Expense, Net (807) 1,006 --------------------- --------------------- 407,442 424,829 --------------------- --------------------- Income Before Taxes on Income 68,894 53,387 Taxes on Income 23,493 20,382 --------------------- --------------------- Net Income 45,401 33,005 Other Comprehensive Income (Loss): Foreign Currency Translation Adjustments 21,552 (8,793) Accumulated (Losses) on Derivatives Qualifying as Hedges (1,167) (179) --------------------- --------------------- Comprehensive Income $ 65,786 $ 24,033 ===================== ===================== Net Income Per Share - Basic $0.48 $0.34 Net Income Per Share - Diluted $0.47 $0.34 Average Number of Shares Outstanding - Basic 94,572 95,756 Average Number of Shares Outstanding - Diluted 96,029 96,735 Dividends Paid Per Share $0.15 $0.15
6 Months Ended 6/30 ----------------------------------------------------------- 2002 2001 ---- ---- Net Sales $ 922,180 $ 961,877 --------------------- --------------------- Cost of Goods Sold 532,476 553,645 Research and Development Expenses 70,192 70,908 Selling and Administrative Expenses 154,307 166,846 Amortization of Goodwill and Other Intangibles 6,316 22,755 Nonrecurring Charges 9,242 21,200 Interest Expense 19,721 39,934 Other (Income) Expense, Net (2,772) 766 --------------------- --------------------- 789,482 876,054 --------------------- --------------------- Income Before Taxes on Income 132,698 85,823 Taxes on Income 45,350 32,546 --------------------- --------------------- Net Income 87,348 53,277 Other Comprehensive Income (Loss): Foreign Currency Translation Adjustments 11,594 (77,586) Accumulated Gains (Losses) on Derivatives Qualifying as Hedges 3,229 (1,776) --------------------- --------------------- Comprehensive Income (Loss) $ 102,171 $ (26,085) ===================== ===================== Net Income Per Share - Basic $0.92 $0.55 Net Income Per Share - Diluted $0.91 $0.55 Average Number of Shares Outstanding - Basic 94,553 96,370 Average Number of Shares Outstanding - Diluted 96,106 97,161 Dividends Paid Per Share $0.30 $0.30
See Notes to Consolidated Financial Statements INTERNATIONAL FLAVORS & FRAGRANCES INC. 3 CONSOLIDATED STATEMENT OF CASH FLOWS (DOLLARS IN THOUSANDS) (Unaudited)
6 Months Ended 6/30 ---------------------------------------------------------- 2002 2001 --------------------- -------------------- Cash Flows From Operating Activities: ------------------------------------- Net Income $ 87,348 $ 53,277 Adjustments to Reconcile to Net Cash Provided by Operations: Depreciation and Amortization 42,398 62,330 Deferred Income Taxes (8,247) (2,031) Changes in Assets and Liabilities: Current Receivables (49,123) (52,108) Inventories 25,884 (260) Current Payables (9,969) (31,353) Other, Net (2,031) (3,108) --------------------- -------------------- Net Cash Provided by Operations 86,260 26,747 --------------------- -------------------- Cash Flows From Investing Activities: ------------------------------------- Proceeds from Investments 32 5,420 Purchases of Investments (13) (15,546) Additions to Property, Plant and Equipment (41,623) (20,160) Proceeds from Disposal of Assets 56,724 2,522 --------------------- -------------------- Net Cash Provided by (Used) in Investing Activities 15,120 (27,764) --------------------- -------------------- Cash Flows From Financing Activities: ------------------------------------- Cash Dividends Paid to Shareholders (28,404) (28,979) Decrease in Bank Loans (9,148) (14,648) Net Decrease in Commercial Paper Outstanding (58,384) (386,880) Net Proceeds from Long-term Debt 1,896 429,013 Repayments of Long-term Debt (4,697) (20,926) Proceeds From Issuance of Stock Under Stock Option and Employee Stock Purchase Plans 26,087 1,151 Purchase of Treasury Stock (44,532) (39,967) --------------------- -------------------- Net Cash Used in Financing Activities (117,182) (61,236) --------------------- -------------------- Effect of Exchange Rate Changes on Cash and Cash Equivalents 1,396 (5,927) --------------------- -------------------- Net Change in Cash and Cash Equivalents (14,406) (68,180) Cash and Cash Equivalents at Beginning of Year 48,521 128,869 --------------------- -------------------- Cash and Cash Equivalents at End of Period $ 34,115 $ 60,689 ===================== ==================== Interest Paid $ 31,000 $ 33,895 Income Taxes Paid $ 42,944 $ 58,150
See Notes to Consolidated Financial Statements 4 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ------------------------------------------ These interim statements and management's related discussion and analysis should be read in conjunction with the consolidated financial statements and their related notes, and management's discussion and analysis of results of operations and financial condition included in the Company's 2001 Annual Report to Shareholders. These interim statements are unaudited. In the opinion of the Company's management, all normal recurring adjustments necessary for a fair presentation of the results for the interim periods have been made. NEW ACCOUNTING PRONOUNCEMENTS: In June 2002, SFAS No. 146, "Accounting for Costs Associated with Exit or Disposal Activities" was issued. This statement requires the recording of costs associated with exit or disposal activities at their fair values only once a liability exists. Under previous guidance, certain exit costs were accrued when management committed to an exit plan, which may have been before an actual liability arose. SFAS No. 146 is effective for exit or disposal activities initiated after December 31, 2002. DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES: The Company has entered into a series of swaps for a $700.0 million notional amount which effectively converts the fixed 6.45% coupon interest rate on the Notes to a variable short-term rate based upon the London InterBank Offered Rate (LIBOR) plus an interest markup. During the second quarter the Company amended the swap, which changed the short-term LIBOR basis and the related spread. As a result of market conditions and the change in the value of the swap, the counter-party paid the Company $1.2 million, including accrued swap interest of $.4 million. The net gain on settlement is being amortized over the remaining term of the Notes. These swaps are designated as qualified cash flow hedges. The Company had no ineffective interest rate swaps at June 30, 2002. The Company enters into foreign currency forward contracts with the objective of reducing exposure to cash flow volatility associated with foreign currency receivables and payables, and with anticipated purchases of certain raw materials used in operations. The notional amount and maturity dates of such contracts match those of the underlying transactions. At June 30, 2002, the Company had outstanding foreign currency forward contracts of approximately $96.0 million. The Company has designated these contracts as qualified fair value and cash flow hedges. Accordingly, the effective portion of the gain or loss on the derivative instrument is reported as a component of other comprehensive income and recognized in earnings in the same period or periods during which the hedged transaction affects earnings. The Company had no ineffective foreign currency forward contracts at June 30, 2002. SALE AND LEASEBACK TRANSACTION: During June 2002, the Company entered into agreements for the sale and leaseback of its Hazlet and South Brunswick, New Jersey facilities. Under the terms of the sale agreement, the Company sold the land, building and associated improvements at these facilities to an unrelated third party for $48.0 million in cash. The leases are classified as operating leases in accordance with Statement of Financial Accounting Standards No. 13, "Accounting for Leases." The net book value of these assets approximated $20.3 million. The book value and associated depreciation of the related assets have been removed from the Company's accounts and the gain realized on the sale, approximating $26.7 million, has been deferred. The deferred gain will be credited to income over the 22-year operating lease term. At June 30, 2002, the unamortized portion of the deferred gain is included in the balance sheet captions "Retirement and Other Liabilities" in the amount of $25.5 million and "Other Current Liabilities" in the amount of $1.2 million. The operating lease agreements provide for renewal options of up to 30 years. Payments under the leases approximate $4.2 million annually and commenced in July 2002. Total lease obligations for 2002 are $2.1 million and for 2003 to 2006 are $4.2 million annually and the aggregate lease obligation is $92.4 million. NET INCOME PER SHARE: Stock options to purchase 2,676,834 and 2,698,918 shares were outstanding for the second quarter and the first six months of 2002, respectively, and 5,291,376 and 4,920,300 shares for the second quarter and first six months of 2001, respectively, but were not included in the computation of diluted net income per share for the respective periods because the options' exercise prices were greater than the average market price of the common shares in the respective periods. 5 SEGMENT INFORMATION: Effective January 1, 2001, the Company was reorganized into five geographic regions with a single manager responsible for each region. The five regions were: North America, Latin America, Asia-Pacific, Europe and Central Asia, Middle East ("CAME"). Effective January 1, 2002, the CAME region was reconstituted as, and renamed the "India Region" (India, Pakistan and other countries in the Indian Subcontinent). Certain operations formerly included in CAME are, from January 1, 2002, included with Europe. North and Latin America and Asia-Pacific were unaffected by the geographic reorganization. The Company's reportable segment information, based on geographic region, follows. Certain prior year amounts have been reclassified for comparative purposes to reflect the geographic alignment and adoption of FAS 142. The Company evaluates the performance of its geographic areas based on segment operating profit, excluding interest expense, other income and expense, certain unallocated expenses, amortization of goodwill, the effects of nonrecurring items and accounting changes, and income tax expense.
Three Months Ended June 30, 2002 ----------------------------------------------------------------------------------------------------------------------------------- North India Latin Asia-Pacific 2002 (Dollars in thousands) America Europe Region America Eliminations Consolidated ----------------------------------------------------------------------------------------------------------------------------------- Sales to unaffiliated customers $159,830 $180,861 $ 10,166 $57,365 $68,114 $ -- $476,336 Transfers between areas 21,085 35,722 748 196 3,582 (61,333) -- ----------------------------------------------------------------------------------------------------------------------------------- Total sales $180,915 $216,583 $ 10,914 $57,561 $71,696 $(61,333) $476,336 =================================================================================================================================== Segment profit $ 23,091 $ 47,938 $ 2,814 $12,542 $13,122 $ 249 $ 99,756 ====================================================================================================================== Corporate and other unallocated expenses (13,133) Nonrecurring charges (9,242) Interest expense (9,294) Other income (expense), net 807 ------------- Income before taxes on income $ 68,894 -----------------------------------------------------------------------------------------------------------------------------------
Three Months Ended June 30, 2001 ----------------------------------------------------------------------------------------------------------------------------------- North India Latin Asia-Pacific 2001 (Dollars in thousands) America Europe Region America Eliminations Consolidated ----------------------------------------------------------------------------------------------------------------------------------- Sales to unaffiliated customers $164,181 $174,684 $ 8,941 $61,758 $68,652 $ -- $478,216 Transfers between areas 20,637 36,694 2,126 272 4,658 (64,387) -- ----------------------------------------------------------------------------------------------------------------------------------- Total sales $184,818 $211,378 $ 11,067 $62,030 $73,310 $(64,387) $478,216 =================================================================================================================================== Segment profit $ 24,223 $ 43,082 $ 3,068 $13,615 $16,807 $ 99 $100,894 ====================================================================================================================== Corporate and other unallocated expenses (11,969) Amortization of goodwill (8,118) Nonrecurring charges (8,780) Interest expense (17,634) Other income (expense), net (1,006) ------------ Income before taxes on income $ 53,387 -----------------------------------------------------------------------------------------------------------------------------------
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Six Months Ended June 30, 2002 ---------------------------------------------------------------------------------------------------------------------------------- North India Latin Asia-Pacific 2002 (Dollars in thousands) America Europe Region America Eliminations Consolidated ---------------------------------------------------------------------------------------------------------------------------------- Sales to unaffiliated customers $308,439 $346,858 $18,887 $114,605 $133,391 $ -- $922,180 Transfers between areas 42,278 63,134 797 356 7,023 (113,588) -- ---------------------------------------------------------------------------------------------------------------------------------- Total sales $350,717 $409,992 $19,684 $114,961 $140,414 $(113,588) $922,180 =================================================================================================================================== Segment profit $ 38,311 $ 86,572 $ 4,691 $ 26,398 $ 28,152 $ (151) $183,973 ====================================================================================================================== Corporate and other unallocated expenses (25,084) Nonrecurring charges (9,242) Interest expense (19,721) Other income (expense), net 2,772 ------------ Income before taxes on income $ 132,698 ----------------------------------------------------------------------------------------------------------------------------------
Six Months Ended June 30, 2001 ---------------------------------------------------------------------------------------------------------------------------------- North India Latin Asia-Pacific 2001 (Dollars in thousands) America Europe Region America Eliminations Consolidated ---------------------------------------------------------------------------------------------------------------------------------- Sales to unaffiliated customers $321,763 $361,809 $ 16,997 $ 123,248 $138,060 $ -- $961,877 Transfers between areas 44,002 69,760 2,387 657 8,567 (125,373) -- ---------------------------------------------------------------------------------------------------------------------------------- Total sales $365,765 $431,569 $ 19,384 $ 123,905 $146,627 $(125,373) $961,877 =================================================================================================================================== Segment profit $ 41,852 $ 85,077 $ 4,963 $ 26,792 $ 31,818 $ (639) $189,863 ====================================================================================================================== Corporate and other unallocated expenses (25,949) Amortization of goodwill (16,191) Nonrecurring charges (21,200) Interest expense (39,934) Other income (expense), net (766) ------------ Income before taxes on income $ 85,823 ------------------------------------------------------------------------------------------------------------------------------------
NONRECURRING AND OTHER CHARGES: 7 As described in Note 2 of the Notes to the Consolidated Financial Statements included in the Company's 2001 Annual Report to Shareholders, in October 2000, the Company announced a reorganization, including management changes, further consolidation of production facilities and related actions. The total pretax cost of actions taken in connection with the reorganization, including $31.9 million and $30.1 million recorded in 2000 and 2001, respectively, is expected to approximate $90.0 million to $100.0 million through the end of 2002. In connection with this program, the Company recorded a nonrecurring charge of $9.2 million ($6.1 million after tax) in the second quarter 2002, related primarily to employee separation costs and other reorganization activities. Of these charges, $4.0 million related to a non-cash asset write-off in North America related to the disposition of the Company's fruit concentrates business. The pretax nonrecurring charges recorded in the second quarter 2002 relate to operations in North America ($4.8 million), Europe ($4.2 million) and Asia-Pacific ($.2 million). Certain costs associated with the merger and the integration of Bush Boake Allen Inc. ("BBA") operations were accounted for as part of the acquisition cost, and did not affect current earnings. Movements in the liabilities related to the nonrecurring charges were as follows (in millions):
EMPLOYEE- ASSET-RELATED RELATED AND OTHER TOTAL ----------------------------------------------------- Balance December 31, 2001 $ 7.0 $ .7 $ 7.7 Additional charges 1.9 7.3 9.2 Utilized in 2002 (1.8) (4.7) (6.5) ------- ------- ------ Balance June 30, 2002 $ 7.1 $ 3.3 $ 10.4 ======= ======= ======
The balance of the liabilities will be utilized by the end of 2003 in connection with the final dismantling and disposal of affected equipment and as severance and other benefit obligations to affected employees are satisfied. The Company has established accruals relating primarily to employee separation costs, facility closure costs and other actions relating to the integration of certain BBA operations into IFF. Costs associated with these integration actions were recognized as a component of the purchase accounting which resulted in an adjustment to goodwill; such costs did not directly impact current earnings. Movements in these acquisition accounting accruals were as follows (in millions):
EMPLOYEE - ASSET-RELATED RELATED AND OTHER TOTAL ----------------------------------------------------- Balance December 31, 2001 $13.8 $ 9.9 $23.7 Utilized in 2002 (3.7) (3.0) (6.7) ----- ------ ----- Balance June 30, 2002 $10.1 $ 6.9 $17.0 ===== ====== =====
RESTRICTED STOCK: In January 2001, the Company awarded approximately 190,000 IFF Stock Units ("Units") to eligible employees in exchange for surrender of their "under water" stock options. The Units vest, in four equal installments, over not more than a seven-year period, upon the Company's Common Stock attaining successively higher market price targets beginning at $22.50 per share, and earn dividend equivalents as and when cash dividends are paid. Compensation expense is recognized over the Unit's vesting period. In the first quarter of 2002, the third price target of $31.50 was achieved and the Company recognized compensation expense of $.8 million which is included in operating expenses. The remaining unvested Units are reported as Restricted Stock on the Company's Consolidated Balance Sheet. 8 On August 1, 2002, the Company's Board of Directors granted Richard A. Goldstein, Chairman and Chief Executive Officer, an award of 200,000 restricted shares of the Company's common stock. Mr. Goldstein's entitlement to all or a portion of the award is subject to the Company's achieving certain levels of shareholder return, compared to those of a specified group of companies, over the three, four and five year periods commencing August 1, 2002. The Consolidated Income Statement and Balance Sheet for and at June 30, 2002 does not reflect this award. The Company will reflect compensation expense over the restriction period and will recognize the restricted stock issuance from Treasury stock with a corresponding adjustment to Capital in excess of par value. COMPREHENSIVE INCOME: Changes in the accumulated other comprehensive income component of shareholders' equity were as follows:
------------------------------------------------------------------------------------------------------------------------- Accumulated gains (losses) on 2002 (Dollars in thousands) derivatives Minimum Pension Translation qualifying as Obligation, net of adjustments hedges tax Total ---------------------------------------------------------------------------------- Balance December 31, 2001 $(156,266) $(2,261) $(20,009) $(178,536) Change 11,594 3,229 - 14,823 ---------------------------------------------------------------------------------- Balance June 30, 2002 $(144,672) $ 968 $(20,009) $(163,713) -------------------------------------------------------------------------------------------------------------------------
------------------------------------------------------------------------------------------------------------------------- Accumulated gains (losses) on 2001 (Dollars in thousands) derivatives Minimum Pension Translation qualifying as Obligation, net of adjustments hedges tax Total ---------------------------------------------------------------------------------- Balance December 31, 2000 $ (77,578) $ - $ - $ (77,578) Change (77,586) (1,776) - (79,362) ---------------------------------------------------------------------------------- Balance June 30, 2001 $(155,164) $(1,776) $ - $(156,940) -------------------------------------------------------------------------------------------------------------------------
BORROWINGS: Debt consists of the following (Dollars in thousands):
Rate Maturities June 30, 2002 December 31, 2001 ---- ---------- ------------- ----------------- Commercial paper (U.S.) $ 145,845 $ 204,229 Bank loans 15,148 21,916 Current portion of long-term debt 1,908 1,800 ------------------------------------------ Total current debt 162,901 227,945 ------------------------------------------ U.S. dollars 6.45% 2006 698,980 698,800 Euro facility 4.79% 2005-06 113,804 101,500 Japanese Yen notes 2.45% 2008-11 125,582 115,300 Japanese Yen notes 1.74% 2005 9,914 9,100 Other 2003-05 3,688 6,404 ------------------------------------------ 951,968 931,104 Interest rate swaps 26,869 8,300 ------------------------------------------ Total long-term debt 978,837 939,404 ------------------------------------------ Total debt $1,141,738 $1,167,349 ==========================================
At June 30, 2002, commercial paper maturities did not extend beyond July 25, 2002. The weighted average interest rate on total borrowings was 3.3% compared to 4.1% at December 31, 2001. The Company records capitalized interest on all projects with a total project value greater than $1.0 million. In the second quarter and for the six 9 months ended June 30, 2002, $.5 million and $.7 million was capitalized which reduced interest expense and increased fixed asset additions. On July 19, 2002, the Company entered into a five-year EURO 350 million, which approximates $350 million, multi-currency revolving credit facility agreement. In connection with the execution of this agreement, the Company repaid all borrowings under its existing EURO 140 million credit facility and cancelled that facility. In addition, on July 31, 2002 the Company exercised its option under its $500 million US revolving credit facility and cancelled the $200 million 364-day portion of that agreement. There were no borrowings under the US agreement. INTANGIBLE ASSETS, NET: Effective January 1, 2002, the Company adopted Statement of Financial Accounting Standards No. 142 (FAS 142), Goodwill and Other Intangible Assets. FAS 142 eliminates goodwill amortization and requires an evaluation of potential goodwill impairment upon adoption, as well as subsequent annual valuations, or more frequently if circumstances indicate a possible impairment. The standard also prescribes that other indefinite lived intangibles be included with goodwill. Adoption of FAS 142 eliminated annual goodwill amortization expense of approximately $33 million. The following tables reflect the reclassification of other indefinite lived intangibles from Trademarks and other to Goodwill at adoption of FAS 142 and the Earnings per share effect of this change for the second quarter and six months ended June 30, 2002 and 2001. The amortization for the second quarter and first six months ended June 30, 2002 was $3.2 million and $6.3 million, respectively, and the estimated amortization for 2002 and the subsequent four years is $12.6 million per year. The Company has completed its assessment of the impact of adopting the impairment provisions of this standard, and has concluded it has no impairment of goodwill at this time.
June 30, 2002 June 30, 2002 Gross Carrying Value Accumulated Amortization ---------------------- ------------------------ Goodwill $684,189 $41,534 Other indefinite lived intangibles 19,200 1,184 Trademarks and other 144,051 21,438 -------- ------- Total $847,440 $64,156 ======== ======= December 31, 2001 December 31, 2001 Gross Carrying Value Accumulated Amortization -------------------- ------------------------- Goodwill $690,509 $41,534 Other indefinite lived intangibles - - Trademarks and other 163,251 16,306 -------- ------- Total $853,760 $57,840 ======== =======
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For the three months ended June 30, Six months ended June 30, ----------------------------------- ------------------------- ($000's except per share amounts) 2002 2001 2002 2001 --------------------------------- ---- ---- ---- ---- Reported net income $45,401 $33,005 $87,348 $53,277 Add back: Goodwill amortization - 8,050 - 16,053 ------- ------- ------- ------- Adjusted net income $45,401 $41,055 $87,348 $69,330 ======= ======= ======= ======= BASIC EARNINGS PER SHARE ------------------------ Reported net income $0.48 $0.34 $0.92 $0.55 Goodwill amortization - 0.08 - 0.17 ----- ----- ----- ----- Adjusted net income $0.48 $0.43 $0.92 $0.72 ===== ===== ===== ===== DILUTED EARNINGS PER SHARE -------------------------- Reported net income $0.47 $0.34 $0.91 $0.55 Goodwill amortization - 0.08 - 0.17 ----- ----- ----- ----- Adjusted net income $0.47 $0.42 $0.91 $0.71 ===== ===== ===== =====
Note: Rounding differences of individual components may cause the total figures to be off by $.01. CONTINGENCIES: There are various lawsuits and claims pending against the Company. Management believes that any liability resulting from those actions or claims will not have a material adverse effect on the Company's financial condition, results of operations or liquidity. RECLASSIFICATIONS: Certain reclassifications have been made to the prior year's financial statements to conform to fiscal 2002 classifications. 11 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION -------------------------------------------------------------------------- OPERATIONS ---------- Worldwide net sales for the second quarter of 2002 were $476.3 million, compared to reported sales in the second quarter 2001 of $478.2 million. The Company disposed of certain non-core businesses in the fourth quarter 2001. On a pro-forma basis reflecting the businesses disposed, second quarter 2001 sales were $462.9 million. Excluding sales from non-core businesses disposed of during 2001, local currency sales for the second quarter 2002 increased 2% in comparison to the 2001 quarter. On a similar basis, reported sales increased 3%. Translation was favorable due to the relative strength of the Euro, and to a lesser extent,the Japanese Yen and the Australian dollar versus the U.S. dollar. Excluding sales attributable to businesses disposed during 2001: o Second quarter sales performance was strongest in India where fragrance sales jumped 27% in local currency (29% in dollars) and flavor sales increased 7%. o Local currency fragrance sales in Europe increased 11% resulting in a 14% increase in dollar sales. The fragrance increase was somewhat offset by expected weakness in Europe flavors, where local currency sales declined 3%, resulting in flat dollar sales. o Asia-Pacific grew 2% in local currency and 3% in reported dollars, despite persistent weakness in the Japanese economy. o The North America region grew 1%, led by a strong 4% growth in flavors. Flavor sales for the 2002 second quarter include only two months of sales attributable to the fruit concentrates business the Company disposed of in the quarter. Excluding fruit concentrates from both 2001 and 2002 second quarter sales, flavor sales would have increased 9% and the region, in total, would have increased 3% compared to the prior year quarter. o Latin America declined 6% for the quarter, mainly due to Argentina as well as slow economies elsewhere in the region. For the first six months of 2002, worldwide reported net sales totaled $922.2 million, compared to prior year comparable period reported sales of $961.9 million. On a pro-forma basis, excluding businesses disposed of during the fourth quarter 2001, net sales for the six-month period ended June 30, 2001 totaled $926.9 million. Also on a pro-forma basis, local currency sales for the six months ended June 30, 2002 were strongest in India where sales increased 7%. Europe, North America, and Asia-Pacific achieved 2%, 1% and 1% increases, respectively, in local currency. Latin America sales declined 7% in relation to the comparable 2001 period. Had exchange rates been the same for the first six months of 2002 and 2001, on a pro-forma basis, sales would have been essentially flat. The percentage relationship of cost of goods sold and other operating expenses to sales for the second quarter 2002 and 2001 are detailed below. The pro-forma information presented in the table below reflects operating expenses as a percent of sales excluding the non-core businesses disposed in the fourth quarter of 2001.
SECOND QUARTER -------------- REPORTED PRO-FORMA 2002 2001 2001 ---- ---- ---- Cost of Goods Sold 57.2% 56.4% 55.5% Research and Development Expenses 7.4% 7.4% 7.6% Selling and Administrative Expenses 16.6% 16.9% 17.4%
12 Cost of goods sold, as a percentage of net sales, increased from the prior year pro-forma percentage primarily due to the unfavorable mix related to weakness in the North America and Europe fine fragrance business. Research and development expenses were in line with expectations. As disclosed in the Company's 2001 annual report, research and development expenditures are expected to grow to 8% of sales as the Company expands its various research and development efforts. Selling and administrative expenses are reduced from both the pro-forma and reported 2001 amounts due to the integration and reorganization savings achieved during the quarter. Other income in the quarter amounted to $.8 million. Interest expense declined from 2001 levels due to the general decline in interest rates as well as reduced borrowing levels. Net income for the second quarter of 2002, totaled $45.4 million compared to reported net income in the second quarter 2001 of $33.0 million. The amounts for the second quarter of 2002 and 2001 include the effects of the nonrecurring charges discussed below. Excluding these charges, net income for the second quarter 2002 and 2001 was $51.5 million and $38.7 million, respectively. On a pro-forma basis excluding the businesses disposed of in the fourth quarter 2001 and the effects of adopting FAS 142 which reduced amortization expense, second quarter 2001 net income totaled $40.4 million including nonrecurring charges, and $46.1 million excluding such charges. The effective tax rate for the second quarter of 2002 was 34.1% compared to 38.2% for the comparable period in 2001. The lower effective rate in 2002 principally results from the discontinuance of goodwill amortization, which was not deductible for purposes of determination of the Company's taxable income in 2001. The percentage relationship of cost of goods sold and other operating expenses to sales for the first six months 2002 and 2001 are detailed below. The pro-forma information presented in the table below reflects operating expenses as a percent of sales excluding the non-core businesses disposed of in the fourth quarter of 2001.
FIRST SIX MONTHS ---------------- REPORTED PRO-FORMA 2002 2001 2001 ---- ---- ---- Cost of Goods Sold 57.7% 57.6% 56.3% Research and Development Expenses 7.6% 7.4% 7.6% Selling and Administrative Expenses 16.7% 17.3% 17.8%
Cost of goods sold, as a percentage of net sales, increased from the prior year pro-forma percentage primarily due to the unfavorable mix related to weakness in the North America and Europe fine fragrance business. Research and development expenses were in line with expectations. As disclosed in the Company's 2001 annual report, research and development expenditures are expected to grow to 8% of sales as the Company expands its various research and development efforts. Selling and administrative expenses are substantially reduced from both the pro-forma and reported 2001 amounts due to the integration and reorganization savings achieved during the first half of 2002. Other income for the first six months amounted to $2.8 million primarily related to exchange gains in Argentina. Interest expense declined from 2001 levels due to the general decline in interest rates as well as reduced borrowing levels. Net income for the first six months of 2002, totaled $87.3 million compared to reported net income in the first six months 2001 of $53.3 million. The amounts for the first six months of 2002 and 2001 include the effects of the nonrecurring charges discussed below. Excluding these charges, net income for the first six months 2002 and 2001 was $93.4 million and $66.7 million, respectively. On a pro-forma basis, excluding the businesses disposed in the fourth quarter 2001 and the effects of adopting FAS 142, which reduced amortization expense, six months 2001 net 13 income totaled $67.9 million including nonrecurring charges, and $81.4 million excluding such charges. The effective tax rate for the first six months of 2002 was 34.2% compared to 37.9% for the comparable period in 2001. The lower effective rate in 2002 principally results from the discontinuance of goodwill amortization, which was not deductible for purposes of determination of the Company's taxable income in 2001. NONRECURRING AND OTHER CHARGES: As described in Note 2 of the Notes to the Consolidated Financial Statements included in the Company's 2001 Annual Report to Shareholders, in October 2000, the Company announced a reorganization, including management changes, further consolidation of production facilities and related actions. The total pretax cost of actions taken in connection with the reorganization, including $31.9 million and $30.1 million recorded in 2000 and 2001, respectively, is expected to approximate $90.0 million to $100.0 million through the end of 2002. In connection with this program, the Company recorded a nonrecurring charge of $9.2 million ($6.1 million after tax) in the second quarter 2002, related primarily to employee separation costs and other reorganization activities. Of these charges, $4.0 million related to a non-cash asset write-off in North America associated with the disposition of the Company's fruit concentrates business. The pretax nonrecurring charges recorded in the second quarter 2002 relate to operations in North America ($4.8 million), Europe ($4.2 million) and Asia-Pacific ($.2 million). Certain costs associated with the merger and the integration of BBA operations were accounted for as part of the acquisition cost, and did not affect current earnings. Movements in the liabilities related to the nonrecurring charges were as follows (in millions):
EMPLOYEE - ASSET-RELATED RELATED AND OTHER TOTAL ----------------------------------------------------- Balance December 31, 2001 $ 7.0 $ .7 $ 7.7 Additional charge 1.9 7.3 9.2 Utilized in 2002 (1.8) (4.7) (6.5) ------- ------- ------ Balance June 30, 2002 $ 7.1 $ 3.3 $10.4 ======= ======= ======
The balance of the liabilities will be utilized by the end of 2003 in connection with the final dismantling and disposal of affected equipment and as severance and other benefit obligations to affected employees are satisfied. The Company has established accruals relating primarily to employee separation costs, facility closure costs and other actions relating to the integration of certain BBA operations into IFF. Costs associated with these integration actions were recognized as a component of the purchase accounting which resulted in an adjustment to goodwill; such costs did not directly impact current earnings. Movements in these acquisition accounting accruals were as follows (in millions):
EMPLOYEE - ASSET-RELATED RELATED AND OTHER TOTAL ----------------------------------------------------- Balance December 31, 2001 $13.8 $ 9.9 $23.7 Utilized in 2002 (3.7) (3.0) (6.7) ------ ------- ------ Balance June 30, 2002 $10.1 $ 6.9 $17.0 ====== ======= ======
NEW ACCOUNTING PRONOUNCEMENTS: In June 2002, SFAS No. 146, "Accounting for Costs Associated with Exit or Disposal Activities" was issued. This statement requires the recording of costs associated with exit or disposal activities at their fair values only once a liability exists. Under previous guidance, certain exit costs were accrued when management committed to an exit plan, which may have been before an actual liability arose. SFAS No. 146 is effective for exit or disposal activities initiated after December 31, 2002. FINANCIAL CONDITION ------------------- Cash, cash equivalents and short-term investments totaled $34.5 million at June 30, 2002. Working capital, at June 30, 2002 was $433.6 million compared to $336.1 million at December 31, 2001. Gross additions to property, plant and equipment during the second quarter and first six months of 2002 were $22.0 million and $41.6 million, respectively. 14 At June 30, 2002, the Company's outstanding commercial paper had an average interest rate of 2.11%. Commercial paper maturities did not extend beyond July 25, 2002 and amounted to $145.8 million. Bank borrowings and the current portion of long-term debt were $17.1 million and long-term debt, including $26.9 million related to the interest rate swaps totaled $978.8 million. The weighted average interest rate on total borrowings was 3.3%. In each of January and April of 2002, the Company paid a quarterly cash dividend of $.15 per share to shareholders. This amount is unchanged from the 2001 dividend. The Company repurchased approximately 0.8 million shares in the second quarter and 1.4 million shares for the first six months of 2002. Repurchases will be made from time to time on the open market or through private transactions as market and business conditions warrant. The repurchased shares will be available for use in connection with the Company's employee benefit plans and for other general corporate purposes. At June 30, 2002, the Company had approximately $25 million remaining under its authorized September 2000 repurchase plan. On July 19, 2002, the Company entered into a five-year EURO 350 million, which approximates $350 million, multi-currency revolving credit facility agreement. In connection with the execution of this agreement, the Company repaid all borrowings under its existing EURO 140 million credit facility and cancelled that facility. In addition, on July 31, 2002 the Company exercised its option under its $500 million US revolving credit facility and cancelled the $200 million 364-day portion of that agreement. There were no borrowings under the US agreement. The Company anticipates that its financing requirements will be funded from internal sources and credit facilities currently in place. CAUTIONARY STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995 ------------------------------------------------------------------------------- Statements in this Management's Discussion and Analysis which are not historical facts or information are "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995, and are subject to risks and uncertainties that could cause the Company's actual results to differ materially from those expressed or implied by such forward-looking statements. Risks and uncertainties with respect to the Company's business include general economic and business conditions, interest rates, the price and availability of raw materials, and political and economic uncertainties, including the fluctuation or devaluation of currencies in countries in which the Company does business. The Company intends its forward-looking statements to speak only as of the time of such statements, and does not undertake to update or revise them as more information becomes available. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK ------------------------------------------------------------------ There are no material changes from the disclosures in Form 10-K filed with the Securities and Exchange Commission as of December 31, 2001. 15 PART II. OTHER INFORMATION --------------------------- ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS --------------------------------------------------- The shareholders of the Company voted on two items at the Annual Meeting of Shareholders held on May 7, 2002: 1. the election of nine directors; and 2. a proposal to approve an amendment to the Company's 2000 Stock Award and Incentive Plan. At the Annual Meeting, at which 81,025,314 shares, or 85.66%, of the Company's Common Stock, were represented in person or by proxy, the nine nominees for director were duly elected to the Company's Board of Directors. There was no solicitation of proxies in opposition to these nominees. Votes were cast for election of directors as follows:
Nominee Votes For Votes Withheld ------- --------- -------------- Margaret Hayes Adame 79,897,291 1,128,023 Gunter Blobel 76,185,469 4,839,845 James R. Cantalupo 80,203,294 822,020 J. Michael Cook 80,211,011 814,303 Peter A. Georgescu 80,219,040 806,274 Richard A. Goldstein 80,224,959 800,355 Arthur C. Martinez 79,891,098 1,134,216 Henry P. van Ameringen 78,643,647 2,381,667 William D. Van Dyke, III 78,346,215 2,679,099
The proposal to approve an amendment to the Company's 2000 Stock Award and Incentive Plan was approved as follows, the votes being legally sufficient to adopt the proposal:
Votes Abstained Votes For Votes Against And Non-Voting --------- ------------- -------------- 67,951,647 12,796,976 276,691
16 ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits. --------- 10(a) Executive Separation Policy, as amended through February 13, 2001. 10(b) Multi-currency Revolving Credit Facility Agreement dated as of July 19, 2002 among International Flavors & Fragrances (Luxembourg) S.A.R.L., as Borrower, the Company, as Guarantor, certain Original Lenders, Barclays Bank PLC, as Agent, ABN AMRO BANK NV and Barclays Capital, as Arrangers. 10(c) Amendment No. 1 dated as of June 10, 2002 to the Five Year Credit Agreement dated as of September 26, 2001 among the Company, as Borrower, certain Initial Lenders and Citibank N.A., as Administrative Agent. 10(d) 2000 Stock Award and Incentive Plan adopted by the Company's Board of Directors on March 9, 2000, as amended and restated through May 7, 2002. 10(e) 2000 Supplemental Stock Award Plan adopted by the Company's Board of Directors on November 14, 2000, as amended and restated through March 12, 2002. 10(f) Deferred Compensation Plan adopted by the Company's Board of Directors on December 12, 2000, incorporated by reference to Exhibit 99 to the Company's Registration Statement on Form S-8 dated May 16, 2001. 10(g) Restated Certificate of Incorporation of the Company, filed with the State of New York Department of State on September 16, 1993. (b) Reports on Form 8-K. -------------------- The Company filed the following reports on Form 8-K during the quarter for which this report on Form 10-Q is filed: o Report on Form 8-K dated May 22, 2002 containing a description of a stock option exercise and related share sales program being implemented by Richard A. Goldstein, Chairman and Chief Executive Officer of the Company, pursuant to which Mr. Goldstein's direct ownership of the Company's shares would substantially increase. o Report on Form 8-K dated June 14, 2002 providing information updating prior filings regarding a purported class action law suit brought against the Company in the Circuit Court of Jasper County, Missouri on behalf of employees of a plant manufacturing microwave popcorn that is owned and operated by Gilster-Mary Lee Corp. 17 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. INTERNATIONAL FLAVORS & FRAGRANCES INC.
Dated: August 12, 2002 By: /S/ DOUGLAS J. WETMORE -------------------------- Douglas J. Wetmore, Senior Vice President and Chief Financial Officer Dated: August 12, 2002 By: /S/ STEPHEN A. BLOCK ------------------------ Stephen A. Block, Senior Vice President, General Counsel and Secretary
EXHIBIT INDEX ------------- Number Description ------ ----------- 10(a) Executive Separation Policy, as amended through February 13, 2001. 10(b) Multi-currency Revolving Credit Facility Agreement dated as of July 19, 2002 among International Flavors & Fragrances (Luxembourg) S.A.R.L., as Borrower, the Company, as Guarantor, certain Original Lenders, Barclays Bank PLC, as Agent, ABN AMRO BANK NV and Barclays Capital, as Arrangers. 10(c) Amendment No. 1 dated as of June 10, 2002 to the Five Year Credit Agreement dated as of September 26, 2001 among the Company, as Borrower, certain Initial Lenders and Citibank N.A., as Administrative Agent. 10(d) 2000 Stock Award and Incentive Plan adopted by the Company's Board of Directors on March 9, 2000, as amended and restated through May 7, 2002. 10(e) 2000 Supplemental Stock Award Plan adopted by the Company's Board of Directors on November 14, 2000, as amended and restated through March 12, 2002. 10(f) Deferred Compensation Plan adopted by the Company's Board of Directors on December 12, 2000, incorporated by reference to Exhibit 99 to the Company's Registration Statement on Form S-8 dated May 16, 2001. 10(g) Restated Certificate of Incorporation of the Company, filed with the State of New York Department of State on September 16, 1993.